Date: May 25th 2018, Tirana
In Focus: Strengthening Public Finance Management
Pillar 1: Sustainable and prudent fiscal framework
Amendment and adoption of the Law on Management of the Budget System in the Republic of Albania (2008) / The Organic Budget Law (OBL) was amended in June 2016 which included:
- introduction of fiscal principles and rules in order to reduce the debt ratio to GDP;
- limit spending during election years;
- control over multi-year commitments;
- better harmonization of public investment in budget preparation; and
- ensuring that privatization income can only be used to finance public debt and / or capital investment.
The implementation of these provisions has already shown results in strengthening fiscal discipline.
Fiscal rules have improved the debt ratio to GDP for 2017 (70% in 2017 versus 72.7% in 2015). Some key measures taken into account during the preparation of the Annual Budget to further reduce the Debt ratio to GDP in 2017 were:
- growth and restructuring of the income base;
- accommodating the structural reform costs,
- saving income from all one-off income that is not included in 2017, and;
- the availability of permanent savings in some periodic expenses.
To avoid the risk of systematically optimistic bias in GDP projections and budget revenues, Article 4/1 of the OBL has created some legally binding rules that the nominal GDP forecasted at each stage of budget planning should not be higher than the corresponding nominal GDP forecasted in the World Economic Outlook (EO), published by the IMF, a rule that was respected in 2017.
The Mid-Year Review Report was prepared for the first time in 2017 and included assessing the application of the requirements for fiscal principles and rules and control of budget execution in the election years
To further improve co-operation between INSTAT, BoA and MFE, a Memorandum of Understanding was finalized in 2016 for the compilation, distribution, transmission, sharing and exchange of data.
INSTAT has compiled and transmitted SFQ data according to the requirements of the ESA 2010 broadcasting program. For the first time in 2017, INSTAT has prepared SFQ data according to the requirements of the ESA 2010 broadcasting program.
MFE with the support of the State Secretariat for Economic Affairs (SECO) and Technical Assistance has improved forecasting methodologies and strengthened capacities in compiling and disseminating SFQ data.
The Public Sector List has been finalized under GFSM 2014 and ESA 2010 and was officially published on the INSTAT website in 2017 and will be published regularly to ensure transparency for users.
A National Monthly Data Page (NMDP) was prepared on IMF assistance and was first published on the INSTAT website providing crucial macroeconomic data.
Another important aspect of the new OBL is emphasizing fiscal risks. In October 2016, a new unit was set up in MFE to be responsible for managing fiscal risk and preparing the Fiscal Risk Statement.
Work is being done to: realize a systematic and inclusive process to enable identification, evaluation, reporting, disclosure and mitigation of fiscal risks; a clear ownership structure, governance policy framework and monitoring mechanisms on State Enterprises (SoEs); and a comprehensive and verified register for all debts related to local government including the publication of a quarterly study of arrears.
The First Fiscal Risk Statement (FRS) has been prepared, and is expected to be published in mid-2018, including information on all contingent liabilities and other fiscal risks of central government.
A draft manual for the compilation of the Fiscal Risk Disclosure (FRS) has been prepared, which aims to provide methodological guidelines for the preparation of a comprehensive consolidated fiscal risk statement for the Government of Albania.
Pillar 2: Well-integrated planning and budgeting of public spending
The MTBP process has been improved by empowering Parliament to vote and approve the MTBP ceilings at the program level and to make ceilings for the three years of the MTBP, a change to consolidate the MTBP process but also discipline the forecast of liabilities contractual arrangements, which extend their financial effects beyond the budget year.
For the first time in 2015, as part of the MTBP documentation, MFE has published the entire list of ongoing and new investments, with details about the total cost of
approved; the cost incurred to date; providing the budget; multi-year commitments during the MTBP period at national, sector and program level.
In 2015, the Economic Reform Program of Albania (ERP) 2016-2018 was adopted, which outlines the main aspects of macroeconomic and fiscal policy as well as the priority structural reforms planned by the Government in the medium term to strengthen the domestic economy and stimulate sustainable growth and increased competitiveness.
The Government of Albania adopted in May 2016 the National Strategy for Development and Integration 2015-2020, NSDI II, which defines the government’s medium and long term goals and strategies for all sectors based on a national vision.
Progress has been made in 2017 to improve the scope of the sectoral strategies and the MTBP, as the ratio of the total funded funds allocated to the sectoral strategies for overall funding identified for the corresponding sectors in the MTBP increased (from 42% in 2014 to 56 % in 2016).
The Office of the Prime Minister in close cooperation with OECD / SIGMA has prepared a new methodology that is currently being piloted in five ministries in order to standardize the process of monitoring and reporting of strategic frameworks (NSDI, sectoral and crosscutting strategies).
In addition to the legal framework, the MTBP is improving in two ways: (i) improving the current MTBP module and (ii) introducing the Program and Budgeting Performance. In this framework, Key Performance Indicators will be introduced to measure the outcomes and MFE will be part of the Strategy Preparation Process as a party to each Strategy to be adopted by Budget Institutions.
The OBL introduced significant changes to reinforce the oversight and monitoring of public investment spending, including State Enterprises and Public Private Partnerships. A public investment management department has been reorganized within MFE. Public investment management procedures that set the criteria for prioritizing large public investment projects were approved in March 2018.
The Strategy, OBL amendments and MFE guidelines are instruments intended to ensure that multi-year commitments are within the three-year ceilings approved by the Parliament’s Annual Budget Law.
The MFE has taken a number of measures to reduce the surplus of arrears that include: the adoption of the Strategy for the Prevention and Reduction of Outstanding Obligations and the relevant guidelines for its implementation. The objectives of this strategy were: Clearing outstanding liabilities accurately, transparently and reliably; and Strengthening of financial discipline to prevent the accumulation of future arrears;
A separate MFE unit has been set up to monitor the overdue debt arrears and prioritize payments.
Since 2016, the Annual Budget Law has been formulated in a more transparent and inclusive manner since it includes, for the first time, tax expense and contingent liabilities and more analytical tables. The Government Financial Informatics System was upgraded by having automated controls over these commitments and the multi-year engagement record is now operational.
At the local government level, with the implementation of the new territorial administrative reform, significant steps have been taken to adapt to the new framework established (consolidation of 373 local government units in 61) during 2015.
The most important steps are related to the introduction of a new formula for the allocation of unconditional transfers to the new units created and the preparation and approval of the two new laws in Parliament: (1) Organization and Functioning of Local Government; and (2) Law on financing of local government “. Territorial and Administrative Reform in 2015 brought about the development of a number of legal and institutional changes:
- local elections were held in June 2015 and 61 mayors took over functions in the newly constituted municipalities;
- a new crosscutting strategy at the national level for decentralization and local governance was adopted to clarify the Government’s vision for decentralization and
- the Law on Local Self-Government was drafted, which decentralized a number of important and high-cost functions for the new local government units, which will have important implications for financial management. Law on Organization and Functioning of Local Governance “, adopted in April 2015: defines the functions, competences, rights and duties of LGUs.
In April 2017, another important law “On Local Finances” was adopted, with the aim of creating the necessary foundations for securing a fiscal and budgetary discipline in all units. With the adoption of this law, important regulatory measures are being implemented to improve financial management in local governance by ensuring a transparent allocation of funds. MFE in cooperation with LGUs has prepared an action plan for payment of arrears and LGUs have met requirements to report quarterly obligations at local level.
Pillar 3: Efficient budget execution
The Government has intensified its efforts to improve the Tax Administration (AT) focusing on: anti-informality, improvements in VAT administration and strengthening of operational work. The methodology used for forecasting revenue from the Statistical and Macroeconomic Department at MFE has improved.
The Law on Tax Procedures (2008) », as amended in November 2016, reflects the main changes regarding the structure of appeal, collection of tax liability, installment payment agreement.
Key reforms in the tax administration have advanced, including the implementation of new rules in the information technology system and comprehensive organizational restructuring, focusing on compliance risk management. The TA Information System used since 2015 by the Tax Authority has been finalized during 2017.
Continued efforts are being made to expand the tax base and improve tax compliance. A variety of support activities and information for taxpayers have been launched, including: website, help desk, call center, business visits and brochures. AT is implementing the Anti-Informality Action Plan. A Two Year Management Plan for Debt Management has been drafted. In 2017, the new law “On the procedure for the removal of tax liabilities from the circulation of means of transport” was approved.
An important project is continuing to build a fiscal cadastre system to properly implement the newly approved property tax law based on value. For this project MFE is receiving donor support such as: SIDA, IMF and EU.
Progress has been made in the Customs Administration during these years of implementation of the PFM Strategy. In customs, a number of important rules and practices have been unified in a coherent set of guidelines to eliminate procedural uncertainties. The new Customs Code was prepared and came into force in June 2017. The Code introduces simplification of customs rules, risk-based approach to consumer controls, generating computer-based clearance procedures.
A new internet site and e-Customs Customs Portal, are offering new real-time services to help businesses and individuals. The twinning project “Modernization of the Albanian Customs Administration” was completed in December 2017.
Key findings related to customs legislation and procedures for the interaction of Information Technology (IT) systems with the EU-NCTS; and Implementation and Customs Transit Intelligence. In March 2017, the Twinning Project “Adapting Albanian Customs Legislation and Procedures to the EU Acquisition and Supporting the Interoperability of IT Systems with the Integrated Tariff Management System”, ITMS, began. last for two years.
The treasury system has advanced by giving access to spending entities. 15 entities (75% of budget expenditures) that have full access to the system can generate consolidated budget reports, including annual financial statements. Work continues to expand SIFQ in SIMFQ.
Work continues to set up another system as well-EAMIS is an automated system to support the Government of Albania in effectively managing development finance and promoting responsible and transparent use of resources.
Further improvements through the PFM reform are continuing in the direction of public debt management. A mid-term debt management strategy 2018-2020 has been drafted, which presents the medium-term debt management strategy objectives and instruments to be used to implement, taking into account the macroeconomic and financial development of markets.
In accordance with the objectives of the Mid-term Debt Management Strategy, the weight of short-term and variable rate instruments in the domestic debt portfolio has been reduced in order to mitigate the risk of refinancing and interest rates.
The risk of refinancing the domestic debt portfolio has improved considerably. Further reduction of refinancing, interest rate and exchange rate risk will continue to be a priority for debt management and some activities are planned in accordance with the Mid-Term Management Strategy of Debt.
The new version of Debt Management and Financial Analysis System DMFAS 6 replaced DMFAS 5.3 in 2016, which allows the management of domestic and foreign public debt. A Money and Debt Management Committee (C & DMC) was set up to improve coordination between budget execution, debt management and monetary policy implementation.
The Law on Public Procurement (2006), has been amended twice during 2014-2017:
- in December 2014 was amended in order to further align the legislation with the new EU Directives respectively Directives 2014/24 / EC and 2014/25 / EC;
- and in order to strengthen the independence of the Public Procurement Commission, the law was amended again in April 2017 for ensuring that “the Public Procurement Commission is the highest procurement body that reviews the procurement appeals in in accordance with the requirements laid down by this Law “.
Currently, Parliament is in the process of selecting the chairman and members of the CPC.
The re-engineering of the electronic procurement system has been finalized. An audit manual on procurement has been developed for SAI.
MFE has been helped by the BOOST initiative, a collaboration with WB, to facilitate public access to budget data and to promote effective use of improved decision-making processes, transparency and accountability.
The “Local Finances” platform, which includes information on quarterly income and expenditure reports, per capita income / expenditure, Fiscal Package, legislative framework of LGUs, approved budgets and MTBPs for each of the 61 municipalities.
A Citizen’s Budget has been prepared and published.
For the first time in 2017, the Mid-Year Macroeconomic, Fiscal and Budget Performance of the Government was published and submitted for approval to the Council of Ministers and for information in the Assembly.
Also, the establishment and implementation of the new Financial Management System (SIMFQ) will further improve the monitoring process.
Pillar 5: Effective internal control
Some legislative amendments were adopted:
- In 2015, the Law on Financial Management and Control (2010) was amended (establishment of the function of the MCF Coordinator in Public Units, improvement of roles and responsibilities of Implementing and Authorizing Officers and strengthening of the requirements of qualification for the selection of Executing Officers)
- Law on Internal Audit “, amended (strengthening the processes of (1) employment as an auditor, (2) certification and (3) continuous professional development of internal auditors)
- Law on Public Financial Inspection “, amended (Strengthening of the role of the unit responsible for public financial inspection, Clarification of the roles and responsibilities of decision-making authorities and structures involved in public financial inspection, Determining the measures to be taken by the Minister of Finance, at the end of the inspection process, etc.)
Implementation of PFM reform has greatly contributed to:
- Raising awareness at all levels of management on the role of Financial Management and Control in the public sector;
- Increase the use of FMC instruments;
- Increasing professional capacities of internal auditors and financial inspectors; and
- Improving the methodology for monitoring the performance of public entities as a support for a more efficient and realistic assessment of the performance of these units.
A twinning project “On the implementation of a modern system for FMC and the Public Financial Inspectorate in Albania” was developed during the years 2014-2016.
Continuous assistance and training is provided to all institutions for the implementation of the FMC system and the practical implementation of FMC tools.
In the context of determining the clear division of duties, during 2018, the General Directorate of Harmonization of Public Internal Financial Control will draw up an instruction for delegating tasks to employees in public institutions.
Pillar 6: Effective external public oversight
The Law on the Organization and Functioning of High State Control was amended in 2015.
The SAI Law has regulated some new SNISA-based requirements such as financial audit, performance audit, continuing professional development program for auditors, and transparency and accountability.
Work is being done to improve the extent of SAI’s findings.
In December 2017, the Medium-Term Development Strategy of SAI, 2018-2022 was adopted
The IPA 2017-2019 Communication Strategy was adopted
Audit reports are summarized quarterly and are regularly published on the SAI website.
The relations between the SAI and the Albanian Parliament have improved considerably. Legal act no. 122, “On the implementation of the SAI obligations to the Albanian Parliament” was approved on 23.06.2017;
The new regulation on audit procedures was adopted in September 2017, ensuring compliance of the audit approach methodology with the INTOSAI Standards, ISSAI;
The new rules and procedures for quality control and assurance are integrated in the Rules of Audit Procedures;
Capacity building and continuous professional development of audit staff was one of the strategic objectives of SAI.
Prepared by: Ministry of Finance and Economy, Albania